NEWS ANALYSIS: Outsourcing could put Romney into White House

by Caroline Baum,
October 19 2012, 09:12

Caroline Baum

NEWS ANALYSIS: Outsourcing could put Romney into White House

FACED with an 8,2% unemployment rate less than four months before the election, US President Barack Obama is trying to deflect attention from his record by undermining Republican opponent Mitt Romney's major selling point: that he is an experienced businessman who knows how to create jobs.

The Obama campaign is running adverts claiming Mr Romney is a "pioneer of outsourcing", a reference to his work at private equity firm Bain Capital. One such advert closes with the question: "Does Iowa really want an outsourcer-in-chief in the White House?"

Never mind that academic studies have found private equity's effect on employment to be mixed. Or that there is "no evidence to support the claim that Romney - while he was still running Bain Capital - shipped American jobs overseas", according to FactCheck.org, a project of the Annenberg Public Policy Centre of the University of Pennsylvania that monitors accuracy in journalism and politics. Or that a similar advert received four Pinocchios (contains whoppers) from the Washington Post's Glenn Kessler (also known as "The Fact Checker"), who called it "misleading, unfair and untrue".

Facts are not the issue here. Image is. Mr Romney needs to seize the day and start wearing his outsourcing stripes as a badge of honour instead of accusing Mr Obama of the same. Often it is as simple as a choice of words. Since the Romney campaign has been slow to respond to the baseless attacks, I would like to offer Mitt a few of my own suggestions on how to change "outsourcing" from a pejorative to a positive.

1. Cheap Goods Guarantor

Mitt, you have been accused of failing to connect with the common man. Which is why you need to get off your Jet Ski and get behind a shopping cart at Walmart, the perfect milieu for a teaching moment.

While you're cruising the aisles, grabbing a pair of jeans here and a box of Cheerios big enough to feed your immediate family there, you can explain how a market economy works; how companies compete with one another to provide the goods and services that consumers want at a price they are willing to pay. For that reason, business strives to become more efficient, replacing labour with machines. Often it behooves companies to produce low-end products in developing countries where labour is cheap. This is called "outsourcing".

It is also called Walmart, and it ensures that American consumers have a wide variety of affordable goods to choose from. Their pay cheques go further. Increased demand means additional output and jobs.

The same holds true for services: outsourcing call centres or backoffice operations to India, for example. Companies pass on savings in the form of lower prices. A 2003 McKinsey Global Institute study found that offshoring creates wealth for everybody except those who lose their jobs in the short run.

When Iowans realise that "outsourcer-in-chief" is synonymous with "cheap goods guarantor", they'll be clamouring to have you in the Oval Office, Mitt.

2. Made for Big Business

To encourage domestic hiring, Mr Obama has proposed a tax credit for "insourcing", for companies that bring jobs back to the US. This is just plain silly, and you can explain why. Any attempt to offer more favour-able tax treatment for new jobs than existing ones creates a range of unintended consequences, including an incentive for companies to game the system. Of course, if the goal is to create government jobs, such a tax break would generate a new class of paper pushers to administer and enforce the programme.

"Made in America" is the equivalent of "Made for Big Business". It's tantamount to mercantilism, a system that favours producers over consumers. Small businesses, the real job creators and the ones you claim to want to help, are not going to assume a long-term expense in exchange for a short-term subsidy.

3. Real-World Model

In a much-cited study on the effect of private equity on employment, the University of Chicago Booth School of Business's Steven Davis and co-authors found that the decline in existing jobs at buy-out targets is offset by the creation of new jobs at new establishments. The net change from leveraged buy-outs is insignificant.

Mitt, you're a numbers guy. The paper's authors compiled a data set of private-equity transactions from 1980 to 2005 and analysed 3200 firms and 150000 establishments before and after acquisition. The same public that bought into some model-driven number of "jobs created or saved" from Obama's $831bn fiscal stimulus in 2009 - and a promise of full employment by now - will appreciate hard data from someone like you.

4. Walk With Giants

All the angst about outsourcing is no more than a failure to understand the benefits of free trade. Just ask your economic adviser, Greg Mankiw. Back in 2004, when Mr Mankiw was chairman of George Bush's Council of Economic Advisers, he caused a kerfuffle when he said outsourcing would "prove a plus for the economy in the long run".

He was right. But what you teach in Harvard's introductory economics course is not necessarily what you say as the president's top economic adviser. In his retelling of the story on his blog, Mr Mankiw cites Adam Smith's The Wealth of Nations : "It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy." Smith was right, Mr Mankiw writes. "Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards."

Yet when the economy is having a tough time, free trade is always the first culprit. I think Americans are ready for a candidate with a horizon longer than the next election.

5. Comparative Advantage

Last year, on NBC's Today show, Mr Obama tried to explain why companies were reluctant to hire in the face of record profits. He said companies were becoming more efficient, substituting automated teller machines for bank tellers.

This is the oldest myth in the book, that automation kills jobs. Yes, the car made buggy makers obsolete, and the Industrial Revolution put farmers out of work. But innovation and new technology raise living standards, lower prices and create new classes of higher-paying jobs. It is the way societies advance and become rich. If the true goal is to create jobs, not wealth, just call a halt to progress.

Mr Obama managed to spend 12 years as part of the University of Chicago Law School faculty without ever learning how an economy works. This is an area where you have a clear comparative advantage, Mitt. Use it, to explain why outsourcing is not a dirty word, or lose it in November.

FACED with an 8,2% unemployment rate less than four months before the election, US President Barack Obama is trying to deflect attention from his record by undermining Republican opponent Mitt Romney's major selling point: that he is an experienced businessman who knows how to create jobs.

The Obama campaign is running adverts claiming Mr Romney is a "pioneer of outsourcing", a reference to his work at private equity firm Bain Capital. One such advert closes with the question: "Does Iowa really want an outsourcer-in-chief in the White House?"

Never mind that academic studies have found private equity's effect on employment to be mixed. Or that there is "no evidence to support the claim that Romney - while he was still running Bain Capital - shipped American jobs overseas", according to FactCheck.org, a project of the Annenberg Public Policy Centre of the University of Pennsylvania that monitors accuracy in journalism and politics. Or that a similar advert received four Pinocchios (contains whoppers) from the Washington Post's Glenn Kessler (also known as "The Fact Checker"), who called it "misleading, unfair and untrue".

Facts are not the issue here. Image is. Mr Romney needs to seize the day and start wearing his outsourcing stripes as a badge of honour instead of accusing Mr Obama of the same. Often it is as simple as a choice of words. Since the Romney campaign has been slow to respond to the baseless attacks, I would like to offer Mitt a few of my own suggestions on how to change "outsourcing" from a pejorative to a positive.

1. Cheap Goods Guarantor

Mitt, you have been accused of failing to connect with the common man. Which is why you need to get off your Jet Ski and get behind a shopping cart at Walmart, the perfect milieu for a teaching moment.

While you're cruising the aisles, grabbing a pair of jeans here and a box of Cheerios big enough to feed your immediate family there, you can explain how a market economy works; how companies compete with one another to provide the goods and services that consumers want at a price they are willing to pay. For that reason, business strives to become more efficient, replacing labour with machines. Often it behooves companies to produce low-end products in developing countries where labour is cheap. This is called "outsourcing".

It is also called Walmart, and it ensures that American consumers have a wide variety of affordable goods to choose from. Their pay cheques go further. Increased demand means additional output and jobs.

The same holds true for services: outsourcing call centres or backoffice operations to India, for example. Companies pass on savings in the form of lower prices. A 2003 McKinsey Global Institute study found that offshoring creates wealth for everybody except those who lose their jobs in the short run.

When Iowans realise that "outsourcer-in-chief" is synonymous with "cheap goods guarantor", they'll be clamouring to have you in the Oval Office, Mitt.

2. Made for Big Business

To encourage domestic hiring, Mr Obama has proposed a tax credit for "insourcing", for companies that bring jobs back to the US. This is just plain silly, and you can explain why. Any attempt to offer more favour-able tax treatment for new jobs than existing ones creates a range of unintended consequences, including an incentive for companies to game the system. Of course, if the goal is to create government jobs, such a tax break would generate a new class of paper pushers to administer and enforce the programme.

"Made in America" is the equivalent of "Made for Big Business". It's tantamount to mercantilism, a system that favours producers over consumers. Small businesses, the real job creators and the ones you claim to want to help, are not going to assume a long-term expense in exchange for a short-term subsidy.

3. Real-World Model

In a much-cited study on the effect of private equity on employment, the University of Chicago Booth School of Business's Steven Davis and co-authors found that the decline in existing jobs at buy-out targets is offset by the creation of new jobs at new establishments. The net change from leveraged buy-outs is insignificant.

Mitt, you're a numbers guy. The paper's authors compiled a data set of private-equity transactions from 1980 to 2005 and analysed 3200 firms and 150000 establishments before and after acquisition. The same public that bought into some model-driven number of "jobs created or saved" from Obama's $831bn fiscal stimulus in 2009 - and a promise of full employment by now - will appreciate hard data from someone like you.

4. Walk With Giants

All the angst about outsourcing is no more than a failure to understand the benefits of free trade. Just ask your economic adviser, Greg Mankiw. Back in 2004, when Mr Mankiw was chairman of George Bush's Council of Economic Advisers, he caused a kerfuffle when he said outsourcing would "prove a plus for the economy in the long run".

He was right. But what you teach in Harvard's introductory economics course is not necessarily what you say as the president's top economic adviser. In his retelling of the story on his blog, Mr Mankiw cites Adam Smith's The Wealth of Nations : "It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy." Smith was right, Mr Mankiw writes. "Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards."

Yet when the economy is having a tough time, free trade is always the first culprit. I think Americans are ready for a candidate with a horizon longer than the next election.

5. Comparative Advantage

Last year, on NBC's Today show, Mr Obama tried to explain why companies were reluctant to hire in the face of record profits. He said companies were becoming more efficient, substituting automated teller machines for bank tellers.

This is the oldest myth in the book, that automation kills jobs. Yes, the car made buggy makers obsolete, and the Industrial Revolution put farmers out of work. But innovation and new technology raise living standards, lower prices and create new classes of higher-paying jobs. It is the way societies advance and become rich. If the true goal is to create jobs, not wealth, just call a halt to progress.

Mr Obama managed to spend 12 years as part of the University of Chicago Law School faculty without ever learning how an economy works. This is an area where you have a clear comparative advantage, Mitt. Use it, to explain why outsourcing is not a dirty word, or lose it in November.

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